Saturday, January 24, 2015

Dramatic Q4 EPS Growth Propels Union Pacific Corp. into 2015


Union Pacific Corp released fourth quarter earnings on Thursday, January 22nd, showcasing yet another strong period of growth.  UNP stock climbed to $119.84 at the end of trading on Tuesday, where it began the day $114.95.  Common shares plateaued as trading carried through yesterday, finishing the afternoon slightly higher at $120.09.  UNP began its precipitous climb on the back of impressive revenue and earnings per share growth, solid margins, rising returns on equity, and a positive outlook entering 2015, among other factors. 

Quarterly revenue, clocking in at $6.15 billion, reflected volume growth in all six major freight divisions.  However, accumulating congestion at West Coast ports, especially Vancouver, has perhaps been the elephant in the room in discussions about growing volume.  In the face of labor disputes, Pacific shipyards have not been able to keep pace with freight volumes and frequently have been subject to slowdowns.  As top management prepares for a global supply disruption, federal mediators have been called in to avoid a total shutdown.  Despite these uncertainties, there are far more reasons to be optimistic about the state of revenue.  The real headline this quarter was, in fact, neither pricing power or nominal revenue growth but increasing turnover: the number of freight carloads and revenue per carload increased by 6% and 3%, respectively.  Quarterly revenue, in sum, grew 9% quarter-over-year, while full year revenue also matched this 9% growth, expanding to $23.98 billion. 

Earnings took the headline in this release.  Union Pacific recorded $1.43 billion in net income, an astounding 22% increase quarter-over-year.  Owing to effective cost-management, value creation from physical assets, and plummeting fuel prices, operating expenses declined in proportion to operating revenue; a 6% spread in total.  Nevertheless, despite faring well for Union Pacific up to this point, dipping oil prices provide further uncertainties for 2015.  Should energy producers begin to declare bankruptcy and cut supply, railroad companies will certainly face declining volume in oil and gas freight, along with complimentary materials like sand, used at oil shale sites.  However, output growth and promising employment data, regardless of counterintuitive inflationary data, should provide the general framework for growth in commercial transportation. 

Value has certainly been passed down to the shareholder.  Basic earnings per share logged $1.61 this quarter and $5.77 for 2014; a 27% and 22% increase, respectively.  The share repurchase program resumed this quarter, reducing outstanding common stock by 3% and conveying confidence to investors.  Shareholders also received a $0.50 dividend earlier this month, adding an attractive income yield to the total return of the stock.  Free cash flow declined this quarter, but was largely due to enormous cash outflows to shareholders and capital expenditures to expand the capacity of freight volume.  Return on Invested Capital rose to 16.2% from 14.7% in 2013- in part due to expanded debt obligations, but primarily due to earnings growth.  These gains in equity value have not gone without notice. Credit Suisse immediately raised its price target for Union Pacific from $130 to $136, and joined the other investment banks in upgrading UNP to “outperform,” an almost ubiquitous classification at this point. 
The investment thesis remains both accurate and descriptive, though new price targets will be needed in response to one of the aforementioned disruptions, a slowdown in growth next quarter, or an unforeseen contraction in the stock price in the weeks to come.  In all, 2015 looks very bright for Union Pacific Corporation.

Friday, January 23, 2015

Regions Financial Misses on 4Q2014 Earnings; Banks Struggle to Grow Revenue

On January 15th Regions Financial reported 4Q2014 earnings of $0.14 per share against estimates of $0.21 per share- a disappointing surprise of -33.33%. Regions reported total revenue of $1.27bb for the quarter, again missing estimates of $1.30bb and down ~6% YoY. Despite falling to around $8.60 in intraday trading after earnings release, the stock has started to rebound and is currently trading at $9.08.

Although missing revenue and eps for the year, Regions’ loan and deposit growth, strategic management of expenses, and strong balance sheet through improved asset quality and credit quality may act as catalysts moving forward.

Deposits for the year grew 2%. As a result of successful execution of Regions360, Region’s relationship-banking initiative, the number of checking, saving, credit card, and wealth management accounts all increased. Total loans for 2014 grew 4%, largely driven by a strong year for commercial lending. Regions commercial and industrial loan balance increased 3% from the previous quarter.

Regions also continues to strengthen its balance sheet, ending the quarter with stronger capital and liquidity ratios from the prior quarter. Continuing credit quality led to a decline in nonperforming loans, total delinquencies, and troubled debt restructurings. Net charge-offs totals approximately .42% of average loans.

Overall, a persistent low interest rate environment has constricted top line growth for most banks. As a result, many financial institutions, including Regions have turned to expense management and maintaining cheap sources of funds. CEO Grayson Hall foresees improved growth in the U.S. economy for 2015 but does not expect short-term rates to increase until the end of 2015. Still he plans to continue a strategy of “remaining diligent with respect to expense control, but opportunistically investing in talent and technology to further accelerate momentum to grow revenue.”

We will continue to closely monitor Regions Financial in the future. The current stop-loss is set at $8.37.

Private Bancorp increases 5.35%




Private Bancorp (PVTB) increased 5.35% to $32.43 on 1/22/14 because they completed selling their Norcross branch to Heritage Financial Group. The amounts of the deal were not released, however the selling of the Norcross branch will add to Private Bancorp’s Q1 earnings, which should be about an increase of $.03 per share. Although they will no longer be in Atlanta, Private Bancorp says they will be more invested in their mid-west branches where they believe they will have more success, which is in line with our investment thesis. 

Monday, January 19, 2015

Bank of America Q4 2014 Earnings

On January 15th, Bank of America reported earnings that largely disappointed analyst estimates.  The overall revenues for the bank total $19 Billion, which were down from the previous Q4 revenues by 13% (year-over-year).  Analysts estimated close to $21 Billion in revenues, so the disappointment in reported revenues caused the stock to drop by over 5% on the day.  Earnings were reported at $0.25 per share, lower than consensus estimates of $0.31.

Although earnings were weaker than normal, analysts were overly concerned with trading revenues, which are ultimately unpredictable and have the least impact on the overall bank.  Due to this focus, the stock reacted negatively and plummeted for the aforementioned 5%.  The majority of the underperformance in the trading platform relates back to the FICC division, which is highly correlated with current interest rates.

Settlement charges and continued litigation expense have hurt Bank of America as well as valuation adjustments that further decreased revenue by $1.2 billion.  As BofA and other large banks in the industry pay fines and incur expenses from the Financial Crisis, it will begin to free future earnings and growth as the industry settles these matters.  As a whole, several other banks reported weak earnings and I am not at all particularly worried about Bank of America.  As of right now, analysts estimate total book value at $21.32 a share, representing a significant room for further upside in the position.  Overall, the company's Net Interest Margin remained stable at 2.31% while Bank of America continues to focus on cost cutting measures within their non-interest expense segment.  The company's main accomplishment has been the achievement of less than 5,000 banking centers, to minimize expenses and further profitability.

As the Federal Reserve continues to keep rates low, banking profitability will suffer.  However, as we move further from the recession and the economy strengthens, there will be further incentive and indicators for interest rate hikes.  Once this occurs, the banks will become increasingly profitable and recognize sizable gains in their stock price.

Sunday, January 18, 2015

Citigroup (C) Q4 2014 Earnings

On January 15th Citigroup posted fourth quarter and full year 2014 earnings.

On revenue of $17.8 billion net income was $350 million or $.06 per share on expected $.09, depressed mainly from a one time legal and re-positioning charge of $3.5 billion.  Net credit losses declined 12% yoy to $2.2 billion, and Citi's Net Interest Margin increased to 2.92%.  The company utilized another $200 million in Deferred Tax Assets (DTA), bringing full year DTA utilization to $3.1 billion.  The Basel 3 Common Equity Tier One Capital Ratio came in at 10.5%, with Supplementary Leverage Ratio (SLR) of 6%.  Citi grew tangible book value roughly 1% to $66.16.

These results portray expected expenses due to the settlement of fines with the Department of Justice, and FINRA. While hurting earnings in 2014, these settlements put the Great Financial Crisis in the review and sets Citigroup up for future success. A continued tough trading environment has led to an industry-wide headwind, although that has picked up by mid-December and into 2015.  Citi Holdings (bad assets) has turned profitable for full year 2014, a big surprise as Citi holdings was expected to continue to drag on earnings (now only 5% of assets).  Citigroup and other large banks submitted their capital plans to the NY Federal Reserve the first week of January, which is expected to include a request of a modest dividend increase to $.05 up from $.01, and about a $10 billion share repurchase program.

Large banks have had a rough time in 2014 as low market volatility has depressed trading revenue, and a continued low interest rate environment has depressed net interest income.  Citigroup has down a good job of slimming operations in stagnant consumer markets such as Japan. Hopefully regulators will pass Citigroup for the first time in three years if they have met the Fed's standard on internal controls.  Passing this year's stress test, which will be announced in March, is vital for Citigroup so they can return capital to patient shareholders.

Saturday, January 10, 2015

Solarwinds (SWI) Sell Thesis

After a record 2Q14 we rode the hype wave to $45.00. After an exceptional 3Q14 beat we continued until $52.00 and then; enough was enough as selling for 50x ttm earnings made us queasy. As we described in the 3Q14 report we maintained our PT and downgraded the name to a hold due to all positive future catalyst being priced in. See below excerpt from 3Q14:

"As a reminder after our double down in late June our average share price increased to $35.59. Currently we are up ~35% on the name. We continue to be encouraged by the results and operating leverage in Solarwinds business model. That being said we believe the near term positives are largely priced in at current levels. We are downgrading our rating to a HOLD and maintaining our PT of $52.00 which assumes a 27.1x multiple to our FY15 EPS of $1.95. Over the last 3 years the stock has sold for ~29x forward earnings. We believe the slight discount is attractive as the Pingdom acquisition, license growth acceleration and operating leverage of business will likely lead to higher profitability and further multiple expansion."


While we are still positive on the stock all catalyst have been in our frank opinion "priced in".  The company hit a 52 week high of $53.44 before starting a descend. We locked in a 35% profit selling at $52.21 and will be waiting on the sidelines for an attractive re-entry point. 

Thursday, December 11, 2014

Spirit Airlines falls 12.67% After November Traffic Report Release

On December 9, 2014, Spirit Airlines (SAVE) fell 12.67% to $73.77. There are a couple of reasons for why this occurred. First, today Spirit Airlines reported their November Traffic report. Although they reported gains in revenue passenger miles (15.7%) and total departures (17.3%), they reported a decrease in load factor (1.6%) which indicates a decrease in Spirit’s ability to fill seats. Also, according to the report, Spirit Airlines has noticed a compression in their fare structure for close-in bookings, especially during off-peak hours. This is likely happening because lower fuel costs is driving fare cost down. As a result of this and other factors within the company, Spirit Airlines expects to generate lower profits in the fourth quarter. Furthermore, they adjusted their expected operating margin to 18-19%. This resulted in Raymond James Financial, Inc. downgrading Spirit Airlines from an “Outperform” to a “Market Perform”
Although, Spirit Airlines may not perform as well as the company thought they would, there is still evidence indicating that there will be continued growth going into 2015 as Spirit Airlines takes advantage of low fuel costs. Furthermore, company guidance still estimates that the operating margin for first quarter 2015 will be 20%. Overall, with this news, it seems that the plunge in Spirit Airlines’ stock price was an overreaction as a result of some negative news and with what is going on globally. On December 9th, other airlines fell in price as well such as American Airlines (-4.94%), Delta Airlines (-2.13%), and Southwest Airlines (-3.19%). In short, although the disappointing November Traffic report, Spirit Airlines will continue to see growth going into 2015